REVIEW: Maldives prints debut US$200m sovereign bond

Maldives printed a debut US dollar bond in a deal arranged by BoCom International, marking the first time that a Chinese investment bank has been the sole lead of an international sovereign bond issue.

As China, which has close economic ties with the Maldives, pushes ahead with its One Belt, One Road initiative, the market expects its banks and investors to become more involved in sovereign bond offerings along the new Silk Road.

In early May, two Chinese banks were part of a syndicate of seven for Sri Lanka’s US$1.5bn sovereign US dollar notes issue.The Maldives ‘US$200m five-year notes were priced at par to yield 7.00%, from initial guidance of 7% area. The Reg S notes are expected to be rated B2/B+ (Moody’s/Fitch), in line with the sovereign.

The International Monetary Fund warned earlier this year that the Maldives is now facing “a high risk of external debt distress” due to large increases in capital spending, which is entirely financed through external loans.

Former President Maumoon Abdul Gayoom, who withdrew his support form the government called the move “bad economics”. It will be a severe burden on the future well-being of Maldives.

An official from a Chinese investment bank also questioned BoCom International’s global distribution capability. “Given the weak appetite of Asian investors for non-investment-grade sovereign dollar bonds, I’m wondering who bought the bonds,” he was quoted as saying.

Imtiaz Ahmed A financial analyst in Colombo shakes his head as he talks about the parallel economies in the Indian Ocean archipelago. “Technically, the Maldives can go bankrupt, if you look at the way economic data is calculated,”

The proceeds are primarily intended for public investment spending, according to Moody’s. Although small, the deal attracted attention since this was the first US dollar bond sale from the Maldives. But, more than that, market participants were curious to understand how BoCom International got the sole mandate.

“It seems odd to have only one Chinese bank in this kind of emerging markets sovereign bond offering,” said a fund manager who focuses on investment in non-Chinese credits. “The deal looks more like a private placement, or at least it seems to have had anchored orders before the launch,” he said.Several factors, however, may explain the choice of a Chinese bank as arranger.

The Maldives is an important link on the so-called Maritime Silk Road, which straddles major international shipping lanes, and Chinese investments in the country have grown significantly in recent years.

China’s President XiJinping made a state visit to the Maldives in September
2014, the first by a Chinese president since the two countries established
diplomatic relationships 42 years earlier.

After the visit, Export-Import Bank of China provided a US$373.8m loan to
build a new runway at Velana International Airport and a US$66m-equivalent renminbi loan to help fund the construction of the Malé-Hulhumalé bridge, with the Chinese government also providing a grant for the link.

Chinese tourists made up 25% of tourists to the Maldives in 2016, up from 6% in 2008, making them the largest group by nationality. A DCM banker from a Chinese investment bank away from the deal said the OBOR initiative was definitely bringing new business for Chinese banks and companies, but he questioned BoCom International’s global distribution capability. “Given the weak appetite of Asian investors for non-investment-grade sovereign dollar bonds, I’m wondering who bought the bonds,” he said.

Total orders for the issue were not disclosed. But distribution statistics showed that 83% of the notes went to Asia and 17% to Europe. In terms of
investor types, 85% of the buyers were asset managers, 10% were banks and 5% were private banks.

A market source said that most of the investors were real money, mainly
emerging market funds, while Chinese investors also bought into the bonds, but they only accounted for a very small portion.

The bonds traded well in the secondary market and were quoted at 101.10/101.375, yielding 6.76%/6.67% in late afternoon, according to a trader. “The bonds are trading surprisingly good, but on light flows, given thesmall issue size,” the trader said.